Every company conducting R&D in South Africa must seriously consider the R&D Tax Incentive as an opportunity to reduce their tax liability and boost their cash flows. During tough economic times, as we have now, this is of considerable value to any business that conducts Research and Development. The incentive is open to companies of all sizes in virtually any sector of the SA economy.  There is no minimum threshold or cap to the tax allowance.

The R&D Tax Incentive is provided for in Section 11[D] of the Income tax Act. It allows your company to deduct an additional 50% on Operational R&D Expenses from taxable income. This reduces your taxable income. The R&D Tax Incentive translates to an effective 14% reduction in SARS income taxes.

In order to qualify for the R&D Tax Incentive, you need to apply to the Department of Science and Innovation, before you start the R&D project. The R&D Tax Allowance is open to businesses of any size, in any sector of the economy. You have to be a registered taxpayer with SARS. The R&D activities must be conducted here in South Africa. Once approved you receive an application number.

So, what is the R&D Tax Incentive [also known as the Scientific and technological Research and Development Tax Incentive]?

South Africa’s Research and Development as a percentage of GDP needs to move towards the target of 1.5% – regarded as the minimum required to help us to compete globally. This target was set in the National Development Plan for achievement by 2030. The aim of this incentive is to encourage South African companies to invest in research and development.

The government introduced Section 11D into the Income Tax Act. This tax incentive enables a taxpayer to claim an allowance with respect to Research & Development (R&D) expenses.

All R&D expenses automatically qualify for a 100% deduction. The South African R&D Tax Incentive provides an additional 50 % ‘super’ tax deduction for certain R&D expenses. This translates to a net 14% income tax benefit. This means if a company spends R1 million on eligible R&D, its tax liability to SARS will be reduced by R140 000. For the investor or shareholder, the main effect is to increase the after tax return on investment. At a corporate tax rate of 28%, the incentive benefit translates into a benefit of 14c for every rand spent on R&D, thus reducing the marginal cost of R&D

What other deductions are available for companies conducting R&D in South Africa?

Section 11D provides another incentive that relates to capital equipment acquired specifically for Research and Development. An accelerated depreciation allowance is provided for capital R&D expenditure on building, machinery, plant, implement, utensil or article. In terms of this accelerated depreciation allowance, 50% of the cost of the asset may be claimed in the year during which the asset is first brought into use, 30% in the subsequent year and 20% in the year thereafter.

What are the company requirements to qualify?

To be eligible, a company must be an incorporated entity and recognised as a company under the Income Tax Act. Individuals, non-profit organisation and trusts are not eligible.

In order to qualify, the company [taxpayer] must comply with the following requirements for the expenditure to qualify for the 150% allowance.

1. The R&D expenditure must be conducted as part of your normal business and trading activities.
2. The R&D activities must be conducted in South Africa.
3. The R&D project and activities must need certain criteria as defined in Section 11D

What happens in the case where R&D is funded by third parties or grants from government. Can I still qualify for the R&D Tax Incentive?

A company that funds R&D undertaken by another company can qualify for R&D tax deduction, provided that the funded company does not claim. A company can also claim a deduction for R&D that it outsources to a South Africa university or science council. Companies in joint ventures (JVs) can claim to the extent that they fund the R&D.

Section 11D(7) acknowledges that a firm can receive other funding from government, public entity or municipality towards its R&D activities.  An amount equal to such a funding will be excluded when the R&D tax deduction is calculated. This is to ensure that only the R&D expenditure incurred by the company qualifies. A company cannot claim for the R&D tax deduction of 150% for the amount of a government grant for the R&D expenses.